Session 2: Balance Sheet

Balance Sheet or Statement of financial position shows how much assets, liabilities and
shareholders equity a company has in a specific period of time. Balance Sheet includes Assets
on one side and Liabilities on the other. Liabilities include Owners Equity and the Liabilities of
the company. Owner's equity is used when the company is a sole proprietorship and
shareholders' equity is used when the company is a corporation. The relation is

Assets = Liabilities + Equity.

For better understanding, let us discuss about the items under the two sides of the Balance Sheet.

Assets:
Assets are economic resources that are controlled by an entity and whose cost (or fair value) at
the time of acquisition could be objectively measured. An asset must be an economic resource
acquired in a transaction. It must be controlled by the business and its cost at the time of
acquisition must be objectively measurable. Assets are usually classified into Current Assets and
Non-Current Assets. The latter could be further categorized into Property, Plant, and Equipment
and Other Assets (Investments, Goodwill).

Current Assets:
Those assets which are expected to be realized as cash or sold or consumed during the normal
operating cycle (usually within a year, whichever is longer), are called Current Assets. Below are
some of the current assets of a balance Sheet:
Cash
Cash includes all currency, both coins and bank notes held by a business in hand and
in bank accounts and cash equivalents.
Marketable Securities
Those investments that are readily marketable and expected to be converted into cash
within a year are called Marketable Securities. They are securities or debts that are to be sold
or redeemed within a year. Eg: government bonds, common stock or certificates of deposit.
Accounts Receivable
Accounts Receivable is the payment which the company will receive from its
customers who have purchased its goods and services on credit. Amounts owed to the
company by parties other than the customers would be recorded under the head notes
receivable or other receivables.
Inventories
Inventories may refer to those items that are
Ready for sale ( Finished Goods)
Work in Progress: in the process of production for sale
Raw Materials: soon to be consumed in the production of good or services that
will be made available for sale
 Inventory relate to only those items which are kept for sale in the ordinary course of
business. Eg: A computer used by the business to maintain records wouldnt be an inventory but
the dozens of computer kept in the warehouse for sale would be accounted as inventories.
Prepaid Expenses
Future Expenses that have been paid in advance. They are asset for the current year but
expenses for the year in which the expenses have to be made.

Property, Plant, and Equipment

The assets that are tangible and have a life span for a long period are called Fixed Assets.
These assets are used by the entity to produce goods and services that will generate cash inflow.
They are not meant for resale. As these assets have been in use for longer periods and their value
decreases which is accounted using Depreciation (the wear and tear of assets).

Other Assets
Investments are securities of one company owned by another either in order to control the
other company in anticipation of earning a long-term return from their investment. They are
different from marketable securities, which are a current asset reflecting short-term use of excess
cash. Those assets which are valuable and controlled by the business but cannot be touched like
goodwill, patents, copyrights, etc are called Intangible Assets.

Liabilities
A liability is an obligation to transfer assets or provide services to outside parties because
of past transactions or events. It is any type of borrowing for improving a business or personal
income which is payable after a period of time. Liabilities can be categorized as Current
Liabilities, Other Liabilities and Owners Equity.

Current Liabilities:
Accounts payable
It is money owned by a business from its suppliers. Amounts owed to financial
institutions are called notes payable or short term loans.
Taxes payable
Those taxes which hOave to be paid to the government agencies.
Accrued Expenses
Expenses that have been incurred by outside parties but havent been paid by the
entity. Eg: Wages and Salaries of employees not paid will come under accrued expenses.
Deferred Revenues (Unearned Revenue)
The amount received by the entity from outside parties for services agreed to be
provided in the future.

Other Liabilities
Liabilities that a company has to pay but are too small or the payment to be paid over a period of
one year (long-term debt).
Owners Equity
Owners Equity shows the amount the owners have invested in the entity. The
terminology for this section varies with the types of organizations. In case of a corporation, it is
under the head, Shareholders equity or stockholders equity. The items under this are:
Capital
It refers to the funds raised to support a particular business or project
Retained Earnings
The percentage of net earnings not paid out as dividends, but retained by company
for future use or to pay debts.

SAMPLE BALANCE SHEET

AS Anand Company
Balance Sheet
as on 31st December, 2017
ASSETS Amount LIABILITES Amount
Current Assets Current Liabilities
Cash in hand 2000 Accounts Payable 5000
Cash at bank 500 Notes Payable 3000
Temporary Investments 1000 Taxes Payable 1000
Petty Cash 500 Accrued Expenses 2000
Inventory 3000 Unearned Revenue 500
Accounts Receivable 1500 Total Current Liabilities 11500
Prepaid Insurance 300
Supplies 2000 Other Liabilities
Total Current Assets 10800 Bonds Payable 2000
Long term loans 3000
Investments 5000 Mortgage 200

Property, Plant, & Total Liabilities 16700

Equipment
Land 3000 Owners Equity
Buildings 4000 Common Stock 10000
Equipment 5000 Retained Earnings 8400
Less: Accumulated
Depreciation (1200)
Net Prop, Plant & Equipment 15800

Intangible Assets
Goodwill 3000
Patents 500

Total Assets 35100 Total Liabilities 35100

In the absence of any specific agreement as to how accounts should be treated at the time of
acquisition, the Partnership Act laid down the following provisions (Sec. 48) for settlement of
accounts.

(a) Losses, including deficiencies of capital, shall be paid first out of profit, next out of capital,
and lastly, if necessary, by the partners individually in their profit-sharing ratio.

(b) The assets of the firm including any sums contributed by the partners to make up
deficien-cies of capital shall be applied in the following manner and order:

(i) In paying the debts of the firm to third parties.

(ii) In paying each partner ratably what is due to him from the firm for advances.

(iii) In paying to each partner ratably what is due to him on account of capital, and

(iv) The surplus, if any, will be divided among the partners in their profit sharing ratio.